FSB’s latest Small Business Index (SBI) in Scotland for Q3 found 29.1% of small firms expect to contract in the next 12 months, compared to just 6.4% expecting to grow.

That pessimism is reflected in negative revenue results in Q3, with more than half (57.0%) of small firms seeing profits drop. The proportion reporting revenue growth fell to a net balance of -43.7%, the second lowest level since the SBI launched 15 years ago.

Overall small business confidence in Scotland has fallen to a net rating of -69.0, a significant decline on the previous quarter (-35.7), the SBI found.

FSB said the results highlighted the need for urgent government action to kickstart the economy.

Guy Hinks, FSB Scotland chair, said: “What Scotland’s small businesses need to see is tangible steps being taken to get the economy moving again. There are several positive measures which the governments at Westminster and Holyrood can take.

“We’re calling on Rachel Reeves to take bold action in the Budget to support entrepreneurship and ease tax and employment cost burdens on small firms – we must turn this around and enable small businesses to grow rather than having their ambitions held back, and in turn hampering economic growth.

“The economy cannot afford for small firms, who employ more than a third of Scotland’s total workforce, to stop hiring or cut staff.

“To that end, the UK Government should increase the Employment Allowance, which helps small employers offset the cost of National Insurance. That would offer some relief from the rise in employers’ National Insurance which was introduced in April and has made it more expensive to hire staff.

“Other positive steps could include a Statutory Sick Pay rebate, to help small employers manage the £5 billion annual cost to UK small businesses of sickness absence. Increasing the VAT turnover threshold to £100,000 would also encourage growth.

“At the same time, the Scottish Government should seize the opportunity offered by its Community Wealth Building Bill to tackle some of the challenges facing small firms bidding for public contracts. This should include targets for increased spending with small and local businesses to ensure the Bill delivers on its aims.”

The drop in confidence in Scotland was one of the steepest among all parts of the UK, with only the East Midlands and West Midlands experiencing a greater drop in Q3. The UK-wide SBI also fell, 14.1 points, to -58.1.

Nine in ten (89.4%) Scottish small businesses experienced increased running costs, with higher tax (56.8%), labour (55.3%) and utility bills (50%) being the biggest drivers.

Looking ahead, fewer than one in ten (8.7%) businesses expect to see an increase in profits over the next three months, which is significantly down on the previous quarter (30%).